The Derivative Project

Why Isn’t Rick Santelli’s Tea Party Movement Focusing on the Most Fraudulent Use of Taxpayer Dollars?

Why Isn’t Rick Santelli’s Tea Party Movement Focusing on the Most Fraudulent Use of Taxpayer Dollars?

Rick Santelli, reporter for CNBC, had a rant on CNBC in February 2009, that decried government bailouts, called struggling homeowners “losers” and speculated aloud that a new Tea Party might be needed.  Here is the link to Rick’s rant about using taxpayer dollars to help out any homeowner that was underwater in a mortgage.

The Derivative Project is very confused. 
Let’s all agree it is the American way to pull yourself up by your bootstraps.  If you do not have adequate funds to take out a mortgage don’t!  If you don’t understand that an adjustable rate mortgage may cause you to pay higher payments down the road, don’t ask the U.S. government for help bailing you out.  Many Americans play by the rules and take time to understand what the terms are of the contract, before they enter into it. If you are too stupid to understand what you are doing it is certainly not the U.S. taxpayer’s responsibility to bail you out. You should be accountable for your own stupidity and your actions, as Mr. Santelli ranted in February 2009.
The Derivative Project cannot understand what appears to be a major inconsistency in enforcement of this logic and financial contract law.  Until this issue is addressed for every U.S. taxpayer, we believe there cannot be real financial reform, the basis of our legal system is in jeopardy and the fabric of our society is unraveling.
Joseph Cassano, CFO at AIG Financial Products unit entered into close to $500 billion of financial contracts, derivative contracts, called credit default swaps, with large, sophisticated financial institutions, like Goldman Sachs around 2006. 
Mr. Cassano made speculative bets with these financial contracts at AIG, which failed.  The U.S. taxpayer was asked to pay Goldman Sachs and other financial institutions, for these failed speculative bets, because Mr. Cassano said he was very sorry, but he just didn’t understand he would have to back up these financial contracts, these bets, with cash it they went against him and AIG.  Everyone knows if a bet goes against you, whether or not you are at Las Vegas on speculating on the price of oil, you have to post collateral when things start to move against you.
Chair of the New York Fed at the time, Timothy Geithner, and Secretary of the Treasury Henry Paulson, both testified and stated to justify this bailout, “There has been much financial innovation.  These were new risks that we just did not understand.  These contracts are very, very complex.”  
These statements to the U.S. taxpayer were completely misleading.  This is a cover-up for a Ponzi scheme  gone bad. There was no “new” risk, there was nothing new under the sun.  It is called “counter party risk” with derivatives which has been managed effectively since the beginning of the Over-the-Counter derivative market in the early 1980′s.  If you speculate, you have to be ready to make good on your contract in any scenario.
The U.S. taxpayer was pressured to gave AIG $180 billion, without any investigation or disclosures and Mr. Cassano was given $35 million and a $1 million per month consulting contract to retire for his “stupidity” that was a major factor in the collapse of the U.S. financial system, causing a recession and high unemployment.
How do we know if it was not fraud?  We all know how tempting if would be to take in millions and millions of dollars by being paid a fee for making a promise in the future.  We are then asked to make good on our promise and we simply state, “I am sorry.  I guess I just didn’t understand what my risk really was.”  Is it not hard to believe if one is making a $500 billion one-way bet they really don’t understand what they are doing?
Should there be any consequences for this stupidity and failure to deliver on a financial contract?  Is is fraud to misrepresent you have the financial capacity to make good on the contracts you are entering into?  U.S. contract law says it is and the contracts may be unwound under this circumstance, if one enters into a financial contract representing they have the capacity to fulfill that contract, but misrepresent that fact.
Without asking the U.S. taxpayer their opinion, without exploring the viable alternatives, the U.S. government insisted that the U.S. taxpayer give Goldman Sachs and other banks the money that Mr. Cassano owed them, because Mr. Cassano did not understand the financial contracts he entered into.  The sophisticated financial institutions did not want to incur these losses for their failure to research the capability of AIG to make good on these contracts.  They pressured Congress, without any substantive rationale, without examination of available alternatives and employed questionable and misleading claims, to make the taxpayer pay for their “apparent” losses.
The Derivative Project has the resources and facts to back up the statement that the U.S. financial system would not have collapsed if collateral payments were not given to AIG’s counter parties.  The U.S. taxpayer was misled.  This wrong must be corrected before our country can begin to heal from this financial crisis for many, many reasons.  
The most important reason is (1) the equal enforcement and the basis of our financial contract law, (2) the second is the misrepresentation of key facts by senior members of the Bush Administration to the U.S. taxpayer and (3) the third is the ongoing interest in continuing the cover-up by the Obama administration by employing Secretary Geithner and Martin Feldstein, Harvard and Reagan Adminstration economist and Board member of AIG, overseeing Mr. Cassano.  It is worth noting President Obama received significant campaign contributions from Mr. Cassano, as did retired Senator Dodd, who was one of the authors of the financial reform legislation.
To recap, if an individual mortgagee fails to understand a contract and cannot make good on his financial contract, it is a criminal offense and he or she is put in jail for failure to meet the contract terms. The Tea Party insists these individuals, as expressed by Mr. Santelli’ s rant, who default on their contracts , must be held accountable.  We agree.
Yet, if a major corporation is a major contributor to the collapse of the entire U.S. financial system, a recession and long-term unemployment, the taxpayer is asked to forgive the corporation’s and that individual’s stupidity. Taxpayer funds are used to bail out these losses with no benefit to the taxpayer, funds that could have been used to shore up our educational system and reduce our staggering debt and trade deficits.
There appears to be a serious double standard in this application of financial contract law, particularly when there is serious doubt as to the validity of the reasons given to the U.S. taxpayer for this taxpayer bailout and a preponderance of evidence of material conflict of interest for those pushing for this taxpayer bailout of AIG.
Why Does One Bring this Issue Up Now?

To move forward, to prevent this from happening ever again, every U.S. taxpayer must understand what actually happened.  The 2010 Congress passed legislation intended to prevent this from reoccurring.  This legislation is called Dodd-Frank.  
The House Tea Party Caucus, Congresswoman Michele Bachman, introduced in January 2011, legislation to repeal Dodd- Frank.